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Dollar Hits A 2-Year Low Against Euro

The dollar, after rising sharply in value for years in a reflection of American economic might, is weakening markedly, mirroring concern about the fragility of the economic recovery and the nation's financial condition.

The dollar fell to a two-year low against the euro today and also edged down against the Japanese yen, continuing a months-long slide. The decline came after new data showed that the United States trade deficit had widened to what some economists said was a worrisome level.

The monthly trade deficit in goods and services rose in April to $35.9 billion, a record, as rising exports were swamped by an even bigger increase in imports. A broader measure of the country's international financial standing -- the current account balance, which measures investment flows as well as trade in goods and services -- also posted a record deficit of $112.5 billion for the first quarter, the Commerce Department reported.

In late trading today, the euro was worth 96.52 cents, up from 95.67 cents a day earlier. The dollar was worth 123.37 yen, down from 123.82 yen.

Since January, the dollar has lost 7.8 percent of its value against other major currencies, according to an index compiled by the Federal Reserve, after rising 33 percent since the mid-1990's. While the dollar is still strong or even overvalued by some measures, its downturn has become pronounced enough that many economists judge it to be at the start of a correction that could continue for some time.

A declining currency would have both positive and negative effects. It would help American manufacturers by making their products less expensive in foreign markets, thereby increasing exports, and could allow domestic manufacturers to recapture sales in the United States by making competing imports more expensive.

But a steady fall in the dollar could put upward pressure on inflation by pushing up import prices, and would make foreign travel more expensive. If the fall in the dollar led investors from abroad to stop putting their money into stocks and bonds in the United States -- and there is already evidence of such a pullback -- interest rates could rise and stock prices could fall further.

Analysts said the dollar's decline appears to have been driven in large part by concern among investors that the United States is not bouncing back as strongly as first hoped from last year's recession.

But they said it was accelerated by other factors, including fear of terrorist attacks and concern after the Enron scandal that more companies will turn out to have overstated their earnings and hidden their liabilities. The Federal Reserve's decision to hold interest rates at very low levels has also held down returns on dollar-denominated investments.

While sticking to its official position that it supports a strong dollar, the Bush administration has shown no inclination to intervene in currency markets to support the dollar's value. As a result, investors have concluded that the administration is content to allow the currency to slide, at least for a while.

The crucial question for the economy is whether the erosion in the dollar, should it continue, will be gradual and orderly, as it has been so far, or whether it will turn into a rout that could destabilize the financial markets and endanger the recovery.

''We're probably going to see a substantial decline in the dollar over the next 12 months,'' said Robert D. Hormats of Goldman Sachs International, the investment firm.

''A gradual decline in the dollar shouldn't be surprising and shouldn't be disruptive,'' he said. ''It would be helpful in improving the outlook for the U.S. economy by boosting U.S. exports. But a very sharp decline would induce foreign investors, and indeed U.S. investors, to get out of U.S. financial assets.''

When countries run large trade and current account deficits -- in effect consuming more than they produce -- they must make up the gap by borrowing and attracting investment from abroad.

History suggests that no country can go on financing an expanding trade deficit forever. And though there is a spirited debate among economists about when the United States might reach that point, the dollar's current slide suggests that foreign investors are already scaling back the flow of capital into the United States and putting more of their money into stocks, bonds and business ventures elsewhere.

One outcome, economists said, is a cycle in which a growing current account deficit spurs an exodus by nervous foreign investors, pushing up inflation and interest rates and putting the already weak economy into a stall.

But even a more benign result, in which the dollar remains under pressure but does not collapse in value, could still leave Wall Street on edge.

''Let's be clear: the ballooning trade deficit is reason to sell the greenback,'' said Kenneth T. Mayland of Clear View Economics, a consulting firm in Pepper Pike, Ohio. ''We risk seeing a flood of dollar selling as everybody tries to get through the door at the same time.''

Jay H. Bryson, an economist at Wachovia Securities, said there were signs in today's report on the current account deficit that the pace of foreign investment in the United States was slowing substantially. He said that private foreign purchases of American securities ran at an annual pace of about $260 billion in the first quarter, compared with $400 billion last year, a 35 percent decline.

Clyde V. Prestowitz Jr., president of the Economic Strategy Institute, a Washington research organization, said it was impossible to know for sure how lengthy and pronounced a slide was in store for the dollar.

''But we've known for a long time that the dollar has been at the way upper range of its value,'' Mr. Prestowitz said. ''We've known for a long time that the trend of the current account deficit is unsustainable, and we've known that the longer it goes on the greater the chance that the adjustment could be disorderly. Now we're at the beginning of an adjustment and we have to hope it's an orderly one.''

Laurence H. Meyer, a former Federal Reserve governor, said the currency's strength was likely to be influenced mostly by whether the American economy rebounded convincingly this year.